Mindful Economics: the Production, Consumption, and Value of Beliefs

Journal of Economic Perspectives—Volume 30, Number 3—Summer 2016—Pages 141–164 Mindful Economics: The Production, Consumption, and Value of Beliefs Roland Bénabou and Jean Tirole n the economic models of old, agents had backward-looking expectations, arising from simple extrapolation or error-correction rules. Then came the I rational-expectations revolution in macroeconomics, and in microeconomics the spread and increasing refinements of modern game theory. Agents were now highly sophisticated information processors, who could not be systematically fooled. This approach reigned for several decades until the pendulum swung back with the rise of behavioral economics and its emphasis on “heuristics and biases” (as in Tversky and Kahneman 1974). Overconfidence, confirmation bias, distorted prob- ability weights, and a host of other “wired-in” cognitive mistakes are now common assumptions in many areas of economics. Over the last decade or so, the pendulum has started to swing again toward some form of adaptiveness, or at least implicit purposefulness, in human cognition. In this paper, we provide a perspective into the main ideas and findings emerging from the growing literature on motivated beliefs and reasoning. This perspective emphasizes that beliefs often fulfill important psychological and functional needs of the individual. Economically relevant examples include confidence in ones’ abilities, moral self-esteem, hope and anxiety reduction, social identity, political ideology and religious faith. People thus hold certain beliefs in part because ■ Roland Bénabou is Theodore A. Wells ‘29 Professor of Economics and Public Affairs, Princ- eton University, Princeton, New Jersey and a Senior Fellow, Canadian Institute for Advanced Research, Toronto, Canada. Jean Tirole is Chairman, Toulouse School of Economics, and President of the Executive Committee, Institute for Advanced Study in Toulouse, both in Toulouse, France. † For supplementary materials such as appendices, datasets, and author disclosure statements, see the article page at http://dx.doi.org/10.1257/jep.30.3.141 doi=10.1257/jep.30.3.141 142 Journal of Economic Perspectives they attach value to them, as a result of some (usually implicit) tradeoff between accuracy and desirability. Such beliefs will therefore be resistant to many forms of evidence, with individuals displaying non-Bayesian behaviors such as not wanting to know, wishful thinking, and reality denial. At the same time, motivated beliefs will respond to the costs, benefits, and stakes involved in maintaining different self-views and world-views. These tradeoffs can be influenced by experimenters, allowing for empirical tests, and by a person’s social and economic environment, leading to the possibility of self-sustaining “social cognitions.”1 At an individual level, overconfidence is perhaps the most common manifes- tation of the motivated-beliefs phenomenon. There is considerable evidence of overoptimistic tendencies on the part of consumers, investors, and top corporate executives (as discussed in a “Symposium on Overconfidence” in the Fall 2015 issue of this journal). While excessive overconfidence is quite dangerous, moderate amounts can be valuable: hope and confidence feel better than anguish and uncer- tainty, and they often also enhance an individual’s ability to act successfully on their own behalf and interact productively with others. Using data from the Survey of Consumer Finances, Puri and Robinson (2007) thus find that more optimistic individuals work more, save more, expect to retire later, and are more likely to remarry after divorce. Alloy and Abrahamson (1979) and Korn et al. (2014) find that most psychologically “healthy” people display some degree of overoptimism and biased updating, while it is primarily depressed subjects who seem to be more objective. People thus finds themselves motivated (often unconsciously) to achieve “positive” beliefs, and this typically occurs through a fundamental asymmetry in the process by which beliefs are revised in the face of new evidence: individuals update suitably when facing good news, but fail to properly account for bad news (Eil and Rao 2011; Möbius, Niederle, Niehaus, and Rosenblat 2011; Sharot and Garrett et al. 2016). Although goal-directed, self-deception can nonetheless end up hurting the individual: since it is an informational game that people play with themselves, the outcome may be highly inefficient—a form of self-trap. When motivated thinking becomes a social phenomenon, consequences can be even more severe. Collectively shared belief distortions may amplify each other (an issue we shall address), so that entire firms, institutions, and polities end up locked in denial of unpleasant realities and blind to major risks: unsustainable fiscal imbalances or labor market policies, climate change, collapse of housing or financial markets, and so on. Case and Shiller (2003) surveyed the expectations of homeowners during the real-estate bubbles of 1988 and 2003. In both cases, 90 percent of respondents thought housing prices in their city would “increase over the next several years,” with an average expected gain for their own property of 9 to 15 percent per year over the next ten years. In the political realm, examples of persistent ideological blind spots impeding reforms and of evidence-proof conspiracy theories are abundant. 1 Parts of this paper draw substantially on Bénabou (2015), which also provides a more explicit treatment of the underlying formal framework. Roland Bénabou and Jean Tirole 143 We now turn to the sources, means, costs, and benefits of motivated cognition. In a sense, we propose to treat beliefs as regular economic goods and assets—which people consume, invest in, reap returns from, and produce, using the informational inputs they receive or have access to. We first highlight the theory’s general prin- ciples, then turn to a number of empirical tests and specific applications. Motivated Beliefs: Why and How? Why? For a standard economic agent, information is always valuable, whether the news is good or bad: more data helps make better choices, and if not, it can just be ignored. The value of information exactly equals the extent to which it improves decision-making, and it cannot be negative. Schelling (1988), in contrast, aptly described “the mind as a consuming organ,” and indeed we are all familiar with beliefs that have a direct and powerful affective impact. These may be perceptions about ourselves, like self-esteem and self-disappointment (Smith 1759; Bénabou and Tirole 2002; Köszegi 2006), or about the broader environment we face and our prospects in it that evoke strong feelings of fear, anxiety, hope, excitement, and so on (Akerlof and Dickens 1982; Loewenstein 1987; Caplin and Leahy 2001; Brunnermeier and Parker 2005; Eliaz and Spiegler 2006; Bénabou and Tirole 2011). Such “consumable” beliefs can be represented as an argument directly entering the preferences of agents. Subjective beliefs also often have an important instrumental value, enhancing “self-efficacy.” First, confidence in one’s ability and chances of success is a powerful motivator to undertake and persevere in long-term projects. This source of demand for “positive” thoughts is generally derived as arising from a self-control problem over effort or tempting consumptions (Carrillo and Mariotti 2000; Brocas and Carrillo 2001; Bénabou and Tirole 2002, 2004). Belief distortions can similarly serve as commitment devices in other settings involving a divergence between preferences that occur before or after a decision, as with an agent who fears “getting cold feet” when a risky decision becomes imminent (Epstein 2008; Eisenbach and Schmalz 2015) or succumbs to “excessive” empathy and generosity when confronted with human misery (Dillenberger and Sadowski 2012). Second, being convinced of one’s strength, determination, talent, honesty, and even sincerity helps convince others. Trivers (2011) and Von Hippel and Trivers (2011) hypothesize that this signaling value is why humans may have evolved the capacity to self-deceive, which later on was coopted for other uses. The framework sketched in the next section will incorporate both classes of motives underlying departures from objective cognition: affective (making oneself or one’s future look better) and functional (helpful to achieve certain goals, internal or external). Religion, the number one form of valued beliefs, typically serves both purposes, simultaneously providing comfort/reassurance and self-discipline. 144 Journal of Economic Perspectives How? A consumption or efficacy motive for holding certain self-views and world-views does not ensure that such views will arise and persist, given the constraints and feedback of reality. Because the activities of paying attention (or not), processing, encoding, and rehearsing data predate the stage where we retrieve and ultimately use these signals, however, they open the door to strategic manipulations of our own information, whether conscious or automatic, progressive or abrupt. The strategies of self-deception and dissonance-reduction used to protect valued beliefs are many and varied, but we can group them into three main types: strategic ignorance, reality denial, and self-signaling. Strategic ignorance consists in avoiding information sources that may hold bad news, for fear that such news could demotivate us, induce distressing mental states, or both. For instance, many at-risk subjects refuse to be tested for Huntington’s disease or HIV

Load more